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Morningstar | Steel Outlook Unchanged but BlueScope’s U.S. Expansion Accretes; FVE Raised 42% (Corrected)

This includes corrections to our note published on March 15. An incorrect steel benchmark was inadvertently incorporated into our forecasts at the time.

We increase our fair value estimate for no-moat BlueScope Steel by 42% to AUD 12.40 per share following a transfer of analyst, despite maintaining a bearish outlook on steel prices. Most of the uplift in valuation is discount rate related, with cost of capital revised to 10.2% from a prior 11%. BlueScope’s improved balance sheet position drives the revised cost of capital estimate. The mooted North Star capacity expansion appears value accretive, and we lift our valuation a further 5% reflecting a 50% probability of the project being approved. Despite our valuation uplift, BlueScope continues to appear slightly expensive in our view, trading at an approximate 8% premium to our fair value estimate.

We continue to anticipate a meaningful contraction in global steel prices over the forecast period, from current levels that have benefited from Chinese supply-side reforms and U.S. steel tariffs. At midcycle, we anticipate East Asian hot-rolled coil pricing of approximately USD 400 per tonne, down around 30% from average prices in 2018. Similarly, we expect materially lower U.S. Midwest hot-rolled coil pricing at midcycle, forecasting USD 600 per tonne--approximately 30% below average 2018 pricing. We therefore forecast group operating margins that contract to 7.5% at midcycle in fiscal 2023. While EBIT margins at midcycle will fall from forecast cyclical highs of 11.3% in fiscal 2019, our midcycle EBIT margin has been upgraded from circa 6%. Greater EBIT contribution from the anticipated expansion at North Star accounts for our revised margin estimate.

We expect the proposed North Star capacity expansion will be approved. We view the expansion as value accretive, given the privileged nature of the North Star asset. We currently ascribe a 50% probability of approval adding circa AUD 1.15 per share in value.